Ivan’s Ambitions

Earlier this week the main story in the news was that of a $400bn gas supply deal made between Russia and China. Most of the media was seemingly awestruck by the magnitude and the much-vaunted (by those making it) significance of the deal, and social media went wild with Russians congratulating each other and making derogatory remarks against the US and Europe.

The western media are not the best at intepretting what goes on in Russia to put it mildly, and Russians – or at least, a significant majority of them – unwilling or unable to question anything which might shake their belief that Russia’s return to greatness is just around the corner.

Regarding the actual deal, the fact that it is being simultaneously trumpted as excellent for both parties yet details kept secret speaks volumes. Anyone who believes that Putin, under considerable pressure following his escapades in Ukraine and the resulting sanctions, and looking for all the world like returning from China empty handed, was able to extract a favourable deal in the early hours of the morning from the Chinese of all people is either stupid or quite deliberately deluding themselves. A blogger calling himself Streetwise Professor has written a good post detailing why the headline announcement should be taken with a pinch of salt, particularly with regards to the paucity of details as to how the price will be indexed, and a comment thereunder sums up nicely what I suspect has happened:

If you want to understand the gas deal, look at the Chinese-Venezuelan energy vassal model. The Venezuelan oil deal was also political rather than commercial, Chinese up front ¨loans¨for infrastructure turned out to be tied to Venezuela single sourcing work and supplies from Chinese contractors, a large part of the ¨payment¨ is actually made up of Chinese barter goods and services at inflated prices, giving China a effective backdoor discount on the headline price. But it was worth it to Chavez so that he could still claim he was freeing Venezuela from the depredations of the ¨evil empire¨. It is no coincidence that on the deal day Russia announced a series of ¨unrelated¨ lucrative no-bid infrastructure contracts in Russia to the Chinese rather than to the usual local suspects. Look to see how much of China`s now redundant construction sector ends up pouring cement and laying pipelines in Siberia rather than building ghost cities back home to understand the actual ¨price¨.

For all we know, the deal might allow for the first cubic metre of gas to be sold at the European rate and the rest thereafter sold at 5 cents. In other words, we are completely reliant on the few individuals involved in the deal to be telling the truth that this deal is good for Russia, and they haven’t simply decided to accept unfavourable terms out of desperation to be able to return to Moscow in triumph. It doesn’t astonish me the degree to which educated Russians accept all of this at face value because we have seen this before, but it does make me wonder if they will react with the same childish display of hurt, betrayal, and injustice that we’ve seen on previous occasions when the Russian public finally realise their leaders have been fucking them over for years.

The irony is that much of Putin’s resource nationalism was driven by the feeling that the Yeltsin government did murky deals with western oil companies from a position of weakness, and in hindsight Russia was being exploited. When Putin finally goes – either through natural causes, after a peaceful transition, or suddenly one night during scenes of chaos and confusion which is the normal method by which leaders exit in Russia – what’s the betting that a future government will decide that Putin et al. agreed to terms which are clearly not in the long term interests of Russia (along with the announcement that he wasn’t actually authorised to make them, hence the contracts are illegitimate)? This wouldn’t be the first time a former Russian president is castigated as bordering on traitorous and the incumbent government decides they want to engage in a spot of a historical (and contractual) revisionism. What would be very interesting is, if and when this time comes, whether the relative positions of Russia and China in the global power games will allow them to do much about it. There is a big difference between bullying a western private oil company and a Chinese state company.

But what’s equally interesting for me is the degree to which Russians have accepted that their place in the world, and their future, is that of energy supplier to a neighbour which is advancing and industrialising at an astonishing pace. It is looking as though China will outstrip Russia in the technological and commercial stakes before too long (if it hasn’t already), and Russia seems content to supply them with the energy to do it. Now there is nothing wrong with Russia supplying energy to China per se, but of all the problems Russia has – and it has many – a lack of hydrocarbon revenue passing through its state-owned companies is not one of them. On the contrary, Russia’s enormous oil and gas revenues have held back other sectors from development, and a supply deal of this magnitude will further consolidate the economy around oil and gas at a time when they should be moving in the opposite direction and diversifying the economy. As with most net exporters of oil and gas, the money has allowed the Russian government to defer the reform of critical institutions (such as the court system) and the economy.

Don’t believe me? Can you name a single consumer product of Russian origin which is desired and exported worldwide? Other than perhaps the odd piece of computer software and Russki Standardt vodka, I can’t think of anything that is not a work of art or literature dating from Tsarist times. For a country which contains so much technological expertise as Russia (really, the engineers, scientists, and mathematicians are superb) it is damning that their chief exports are raw materials and bags of dodgy cash. The Russian government obviously realises this as every few years we hear about some new technology park or development initiative which they promise will be exempt from the normal bureaucratic bullshit and corruption which kills most Russian business ventures at birth, but ultimately go nowhere. The reason for this is simple: the bureaucracy and corruption in Russia is as much a feature of the country as the snow and the vast distances, and cannot be eliminated on the whim of a politician – even supposing he is sincere.

Russian President Vladimir Putin is to create a fund to invest in local production as he seeks to reduce his country’s reliance on Western imports.

Mr Putin said in a speech that Russia would cut its dependence on energy exports and pledged to boost major domestic banks and industries.

So Russia is going to cut its dependence on energy exports by signing a massive, 30-year deal to supply gas to China, and invest the money in “local production”. Right, and how is that going to work exactly? Of course, the money – even if we believe the headline rates – will be filtered through the hugely inefficient state-run Gazprom, before being diligently managed and distributed by an organisation headed by one of Putin’s cronies who of course will resist the temptation to spend it propping up his mates’ failing, decrepit factories producing stuff nobody wants. Uh-huh.

Analysts said he was trying to persuade the international community that Russia’s economy could survive alone.

Didn’t the Soviet Union try that for 70 years? How did that work out, again?

Russia imports a lot of technology, especially in oil and gas exploration, and relies on access to finance in the West.

There’s a reason for this. Despite Russia possessing easily enough brainpower to become a technological powerhouse, the dearth of basic management skills (to the extent few captains of Russian industry respect a contract if a clause is proving inconvenient) coupled with stifling bureaucracy and corruption ensures Russian businesses – with the exception of the mobile phone companies and one or two rare exceptions – remain laughably inept, providing goods and services which Russians avoid at all costs and bitch mightily about when they can’t.

Even Gazprom, which promotes itself via sponsorship of the UEFA Champions League as Europe’s leading energy provider, operates Soviet-era gas fields using ancient technology and crumbling infrastructure. Its flagship facility, the Sakhalin 2 LNG plant, they appropriated immediately after it was completed by Royal Dutch/Shell. Their most impressive recent projects involve the laying of pipleines: which is fine in itself, but surely the national champion of Russia – the country that gave us Mendeleev, Sputnik, and the Mig-29 – should be doing something a bit more advanced than laying pipelines and pumping gas?

And this is what is most strange about prevailing Russian opinion. Whilst China is developing (or at least copying) modern, industrial techniques and impressing the world with the speed at which it is grasping concepts and methods previously found only in the west, Russia sees its future as a regional gas station. I can understand African and Asian countries trumpeting energy supply deals as such agreements often represent genuine industrial advancement compared to, say, 30 years ago. But how does this deal between Russian and China represent an advancement for Russia, other than as a potential source of yet more revenues which will be largely squandered with what remains ensuring other areas of the economy remain undeveloped? Russia has been supplying enormous quantities of gas to Europe for 50 years; now, after decades of trying to do what American executives achieve in a normal working day, they’ve managed to agree a price to do the same for the Chinese and we are expected to quake in our boots at the rise of Russia? Seriously? And if you speak to Russians about why they are so confident that they will be taken seriously as nation, the first thing they mention is this gas supply and sometimes they even mention their lumber industry. I don’t think I’ve heard anyone talk about the importance of forestry in an economy since high school geography.

Many people in Europe and American have spent the past two months issuing dark warnings about Russia’s ambitions. I’m of the opinion the real concern is that they seemingly have none at all.

One Response to Ivan’s Ambitions

It would be best if the government focused on the rule of law instead of setting up Skolkovo” and RusNano. Whenever someone in the private sector does something right and succeeds, the state steps in and demands to have control. That includes the oil sector. First Rosneft gobbled up Yukos with its better-than-average staff and practices. For a while Rosneft had the smarts to leave production units as they had been under Yukos, although not for very long. Then Rosneft bought TNK-BP, perhaps the best-managed Russian oil company, and got itself some great professionals but totally ruined the business process. Now Bashneft, another successful private company, is under threat of nationalization.